02 February 2009

ISFL - Recession triggers 18pc drop in global pension assets

The steep fall of global pension assets between end-2007 and end-2008, is the largest annual decline for many years, ISFL finds. The economic recession has affected pension schemes across the world in several ways.

The steep fall of global pension assets between end-2007 and end-2008, is the largest annual decline for many years, ISFL finds. The economic recession has affected pension schemes across the world in several ways.

 

Key developments in relation to pension scheme assets have been:

Ø       Exposure to equities that contributed to negative returns in most countries.

Ø       Diversification into alternative asset classes that turned out to have much higher correlation to equities in a market sell off than anticipated.

Ø       Assets in jurisdictions which required large weightings in domestic government bonds (the only safe haven asset during the year) were best protected.

Ø       The 18% fall to $25 trillion in the value of global pension assets between end-2007 and end-2008, the largest annual decline for many years.

 

This provided some relief to defined benefit (DB) schemes, but not to defined contribution (DC) and private pension funds, where annuity values for those retiring were substantially reduced. Pension fund returns in most countries turned negative in 2008 as most asset types fell in value. Nearly all countries recorded negative nominal rates of return in the first 10 months of 2008, with an average of -19% reported across the OECD. The UK return of -10% was less negative due to declining exposure to equities and the falling value of sterling which lifted the value of income on overseas investments.

 

The UK faces a number of challenges relating to the financing of both public and private sector provision. Increasing costs have resulted in the closure of many private sector DB schemes: membership of open DB schemes has therefore halved to 3.3msince the early 1990s. Contributions to the DC schemes that have replaced them, at 9%of salary, are only about half that to DB schemes.

 

There has been increased interest from companies in the insurance buyout market as a means of partial or full exit from their pension liabilities. The aggregate deficit for FTSE 100 companies was £40bn at end-June 2008. The Pensions Act 2008 contains a number of measures aimed at encouraging greater private pension saving, particularly amongst those where pension provision is currently limited. DB remains the dominant form of provision in the public sector. While there have been some reforms to public sector schemes, a substantial unfunded deficit remain.

 

Full report attached below

 

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